Ken Kaufman, Managing Director, Chair, and co-founder of Kaufman Hall, explains how the COVID-19 pandemic could affect hospital finances and strategy, and what we are learning about changes necessary in the healthcare system as a whole.
Q: How should healthcare executives think about their financial and strategic plans in light of the upheaval caused by the COVID-19 pandemic?
A: As we move through this crisis, one thing that CFOs and CEOs should be focused on is the importance of redoing their financial plans.
For organizations that do systematic financial planning, those plans have been constructed using a very careful process over the years, which helps organizations decide which strategies to support and what capital to spend. The output of that plan is what you expect your financial results, balance sheet, position in the capital markets, and capital capacity to look like.
These are the critical variables for running an organization in a financially responsible way. In the face of the COVID-19 pandemic, all of these factors have likely moved to a very different place than any organization’s financial plan contemplated. That means in the past two or three weeks, the assumptions of the management team and the board about how aggressive they can be from a strategic and capital-spending point of view have almost certainly changed in a very significant way.
It will be very important at some point—and that time will be different for different organizations depending on how much they're affected by this crisis—to figure out how significant those changes have been and the extent to which the overall financial support for the strategic plan is still in place. That understanding will inform what adjustments need to be made to the amount of risk an organization is willing to take.
Q: What dimension of change might organizations see to their balance sheets and capital capacity as the crisis plays out?
A: It depends on where the stock market finally winds up and how organizations were investing. Some hospitals have taken really big hits. Others have long-term plans around a balance sheet that doesn't exist anymore. For example, many hospitals suddenly have a cash-to-debt position in which the debt hasn’t changed, but the cash has changed dramatically.
Then of course some organizations have had to dramatically increase expenses in order to fight the virus, and others have chosen to cancel either all or most of their elective procedures, resulting in substantial declines in revenue. At some point, you have to add this all up and figure out where you are.
Q: Let's talk about what the virus has shown us about the supply chain.
A: We've discovered from this situation that we have a broken supply chain process in American healthcare. Hospitals and other organizations have worked incredibly hard to have contemporary supply chain processes. To a great extent, materials are handled on a just-in-time basis. Organizations work really hard to lower their supply costs and to handle supplies in a way that is similar to the way the rest of corporate America handles its supply chains.
We have now discovered that this approach works great on a normal day-to-day basis. But when you have a black swan event like the coronavirus, that approach comes up as completely inadequate.
We’ve heard that there is no transparency in the supply chain. So if suddenly a lot of hospitals need a particular supply, they don't know where they can get it. And of course the globalization of the supply chain in this kind of situation worked against itself completely. Much important material was made in China. It ended up that China needed all of that material for itself, and it also had to shut down manufacturing plants to defend itself against the virus. As a result, we wound up with extraordinary shortages of masks and other protective equipment. There was no backup plan.
I hear people saying, "We weren't properly prepared." But it strikes me as more complicated than that. How would you have been prepared based on the way the supply chain works right now?
At this point, the only conclusion is that something like this will happen again. We have to stockpile for it. We need warehouses of supplies that would be required in an emergency so that U.S. hospitals are not dependent on other countries and other manufacturers for those supplies.
That's going to immediately introduce several hard questions. Who’s going to pay for all of that? How are you going to figure out how much you need? How would you allocate it once we have the next black swan event?
This is a really complicated question that will require a lot of studying. But we have to figure this out because we have to assume that in the kind of world that we live in, this won't be the last time we see this kind of pandemic.
Q: What is the crisis telling us about capacity?
A: For normal times, the healthcare industry had significant overcapacity in most markets around the country. Now we get into this situation, and we don't have enough capacity, not necessarily total beds, but specifically negative-pressure rooms and ICU rooms. We also see a strain on the ability to intake people through the emergency room. What we lack, then, is not overall capacity, but surge capacity. Does that mean that we are going to husband capacity now on an ongoing basis, and accept the costs of husbanding that capacity in order to have surge capacity? How can we figure out what surge capacity is necessary going forward? These are extraordinarily complicated macro health planning questions in a country that generally doesn't actually do much macro health planning.
Q: What else has the virus shown us about our healthcare delivery system?
A: I think we may have broken through on telemedicine. Telemedicine has been developing rather slowly. Many providers didn’t really care for it, and many consumers were uncertain about it, and reimbursement was questionable.
Now millions and millions of people have discovered that telemedicine works very well, that it has worked in a crisis, and I assume that it will have a more prominent place in our healthcare system when the pandemic is over. People who used telemedicine during the pandemic will say, “This works just fine. I want it to be a bigger part of my healthcare experience.”
Q: What are your thoughts about balancing the desire to restart the economy with the health concerns?
A: The economist Milton Friedman famously said, “There's no free lunch.” What he meant was, in economic terms, you have to give something up in order to get something.
Now we have very active talk from the current administration and prominent individuals advocating that we reopen the economy as soon as possible. Here’s what we need to understand about that: If we decide to reopen the economy before this pandemic is truly contained, that means we are willing to have more disease and more deaths, which will put maximum stress on American hospitals, and will put additional and perhaps maximum risk on the health of healthcare workers.
That is the Friedmanian exchange. You can reopen the economy and perhaps moderate the depth of the coming recession. But in order to get that advantage, somebody or something has to experience a disadvantage. That disadvantage will be on the American healthcare system. And I believe we need to protect the American healthcare system and its heroic doctors, nurses, and support staff from that potentially very harsh disadvantage.